Framework stage 4: Invest
Inflation, interest rates and the economy
Understand how inflation, interest rates and the economy affect your decisions, without trying to predict them.
Why it matters
Headlines about the Fed, inflation and recessions can feel either irrelevant or alarming. Learn what these forces are, how they affect borrowing, saving and investing, and why a good plan is built to hold up in many economic environments.
Questions this topic answers
- What does the Federal Reserve actually do?
- How does inflation affect my savings?
- Why do interest rates matter for my loans and investments?
- What happens to markets in a recession?
- How should I react to market volatility?
Key ideas
The markets & macro essentials.
The concepts that come up again and again, in plain English.
- Inflation
- The general rise in prices over time, which reduces what each dollar buys. Cash earning less than inflation loses purchasing power.
- The Fed and interest rates
- The Federal Reserve sets a target for short-term interest rates, which influences what you earn on savings and pay on loans.
- Bond prices and rates
- When interest rates rise, existing bond prices generally fall, and when rates fall, prices generally rise.
- Business cycle
- The economy’s recurring pattern of expansion and contraction. Recessions are a normal, if painful, part of it.
- Volatility
- How much and how quickly prices move. Stocks’ short-term swings are part of the risk investors accept in pursuit of long-term returns.
- Valuation
- How expensive an asset is relative to its earnings or cash flows. Valuations can inform long-term expectations but are a poor short-term timing tool.
Lessons
Go deeper.
The first lessons for this topic are in development. Until they publish, start with the key ideas and trusted sources on this page.
In development
- Inflation and your moneyPlanned
- The Fed and interest rates, explainedPlanned
- Bonds and rates: the seesawPlanned
- What a recession means for your planPlanned
- Reading economic indicatorsPlanned
- Market volatility and staying the coursePlanned
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Trusted sources
Primary sources worth bookmarking. They open in a new tab.
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